-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F1HZchHdIvsp586ROB7sEbBx4qjiiJ7PrbWdmSJYJRIsCiqapmbQDc/7fbGXU0MN eMyWV/7hLUy3+amTRjb8Vg== 0001047469-98-040752.txt : 19981116 0001047469-98-040752.hdr.sgml : 19981116 ACCESSION NUMBER: 0001047469-98-040752 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UTILX CORP CENTRAL INDEX KEY: 0000821361 STANDARD INDUSTRIAL CLASSIFICATION: WATER, SEWER, PIPELINE, COMM AND POWER LINE CONSTRUCTION [1623] IRS NUMBER: 911171716 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16821 FILM NUMBER: 98748361 BUSINESS ADDRESS: STREET 1: 22820 RUSSELL ROAD STREET 2: P O BOX 97009 CITY: KENT STATE: WA ZIP: 98064-9709 BUSINESS PHONE: 2353950200 MAIL ADDRESS: STREET 1: 22820 RUSSELL ROAD STREET 2: P O BOX 97009 CITY: KENT STATE: WA ZIP: 98064-9709 FORMER COMPANY: FORMER CONFORMED NAME: FLOWMOLE CORP DATE OF NAME CHANGE: 19910609 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 -------------------------------- UTILX CORPORATION COMMISSION FILE NUMBER 0-16821 DELAWARE 91-1171716 (State of Incorporation) (I.R.S. Employer Identification Number) 22820 RUSSELL ROAD (98032) P. O. BOX 97009 KENT, WASHINGTON 98064-9709 (253) 395-0200 (Address of Principal Executive Offices) (Registrant's Telephone Number) Indicate by checkmark whether the Registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) been subject to such filing requirements for the past 90 days. Yes X No --- --- As of September 30, 1998, 7,425,560 shares of Common Stock were outstanding. The total number of pages in this Form 10-Q is 19 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
ITEM PAGE - ---- ---- PART I 1. Financial Statements Consolidated Balance Sheet September 30, 1998 and March 31, 1998............................. 3 Consolidated Statement of Operations For the three Months Ended September 30, 1998 and 1997....................................... 4 Consolidated Statement of Operations For the Six Months Ended September 30, 1998 and 1997....................................... 5 Consolidated Statement of Cash Flows For the Six Months Ended September 30, 1998 and 1997....................................... 6 Notes to Consolidated Financial Statements........................ 7 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 10 PART II 1. Legal Proceedings................................................. 17 2. Changes in Securities............................................. 18 3. Defaults Upon Senior Securities................................... 18 4. Submission of Matters to a Vote of Security Holders............... 18 5. Other............................................................. 18 6. Exhibits.......................................................... 18 SIGNATURES ............................................................ 19
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UTILX CORPORATION CONSOLIDATED BALANCE SHEET SEPTEMBER 30 AND MARCH 31, 1998 (IN THOUSANDS, EXCEPT SHARES) ASSETS
SEPTEMBER 30 MARCH 31 ------------ -------- (UNAUDITED) Current assets: Cash and cash equivalents..................................... $ 1,216 $ 528 Accounts receivable, trade.................................... 14,571 19,720 Materials, supplies and inventories........................... 8,550 8,839 Income taxes receivable....................................... 455 433 Prepaid expenses and other.................................... 156 284 --------- -------- Total current assets ..................................... 24,948 29,804 Equipment and improvements, net.................................... 13,457 13,091 Other assets, net.................................................. 414 584 --------- --------- Total assets ............................................. $ 38,819 $ 43,479 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable to bank.......................................... $ 3,060 $ 5,245 Current portion of capital lease obligations.................. 922 839 Accounts payable.............................................. 3,184 3,993 Accrued liabilities........................................... 5,476 5,475 --------- --------- Total current liabilities................................. 12,642 15,552 Capital lease obligations, net of current portion.................. 2,241 2,224 Other long-term liabilities........................................ 885 872 --------- --------- Total liabilities...................................... 15,768 18,648 --------- --------- Commitments and Contingencies Stockholders' equity: Common Stock, $0.01 par value (authorized 25,000,000 shares)............................ 74 74 Additional paid-in capital.................................... 18,520 18,469 Retained earnings............................................. 4,903 6,790 Cumulative foreign currency translation adjustment............ (446) (502) ---------- ---------- Total stockholders' equity................................ 23,051 24,831 -------- --------- Total liabilities and stockholders' equity........... $ 38,819 $ 43,479 ========= ========= Common Stock issued and outstanding........................... 7,425,560 7,407,760
(See Notes to Consolidated Financial Statements) 3 UTILX CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
1998 1997 ---- ---- Revenues........................................................... $ 18,885 $ 20,734 Cost of revenues................................................... 18,453 18,898 --------- --------- Gross profit.................................................. 432 1,836 --------- --------- Operating expenses: Selling, general and administrative........................... 2,008 1,916 Research and engineering...................................... 207 130 --------- --------- Total operating expenses.................................. 2,215 2,046 --------- --------- Operating income (loss) ........................................... (1,783) (210) Other expense, net................................................. (128) (110) --------- --------- Income (loss) before income taxes.................................. (1,911) (320) Income tax benefit................................................. 9 0 --------- --------- Net income (loss).................................................. $ (1,902) $ (320) ========= ========= Earnings (loss) per share (Note 2): Basic......................................................... $ (.26) $ (.04) Diluted....................................................... $ (.26) $ (.04) CALCULATION OF COMPREHENSIVE INCOME (LOSS): Net Income (loss)........................................... $ (1,902) $ ( 320) Change in cumulative foreign currency translation adjustment, net........................ 63 (90) ---------- --------- Comprehensive Income (loss)................................. $ (1,839) $ (410)
(See Notes to Consolidated Financial Statements) 4 UTILX CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
1998 1997 ---- ---- Revenues........................................................... $ 40,908 $ 39,501 Cost of revenues................................................... 37,899 35,765 --------- --------- Gross profit.................................................. 3,009 3,736 --------- --------- Operating expenses: Selling, general and administrative........................... 4,280 3,854 Research and engineering...................................... 354 288 --------- --------- Total operating expenses.................................. 4,634 4,142 --------- --------- Operating income (loss) ........................................... (1,625) (406) Other expense, net................................................. (262) (181) --------- --------- Income (loss) before income taxes.................................. (1,887) (587) Income tax provision............................................... 1 --------- --------- Net income (loss).................................................. $ (1,887) $ (588) ========= ========= Earnings (loss) per share (Note 2): Basic......................................................... $ (.25) $ (.08) Diluted....................................................... $ (.25) $ (.08) CALCULATION OF COMPREHENSIVE INCOME (LOSS): Net Income (loss)........................................... $ (1,887) $ (588) Change in cumulative foreign currency translation adjustment, net........................ 58 (40) ----------- ---------- Comprehensive Income (loss)................................. $ (1,829) $ (628) ========= ========
(See Notes to Consolidated Financial Statements) 5 UTILX CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (IN THOUSANDS) (UNAUDITED)
1998 1997 ---- ---- OPERATING ACTIVITIES: Net income (loss)........................................................ $ (1,887) $ (588) Adjustments to reconcile to net cash provided by (used in) operating activities: Depreciation and amortization........................................ 2,233 2,003 Other non-cash expenses, net ........................................ (1) 50 Changes in assets and liabilities.................................... 6,072 (5,949) --------- ---------- Total adjustments.................................................... 8,304 (3,896) --------- ---------- Net cash provided by (used in) operating activities............. 6,417 (4,484) --------- ---------- INVESTING ACTIVITIES: Cost of additions to equipment........................................... (1,943) (1,368) Proceeds from sale of equipment.......................................... 37 0 --------- --------- Net cash used in investing activities........................... (1,906) (1,368) ---------- ---------- FINANCING ACTIVITIES: Net borrowings (repayments) on note payable.............................. (2,185) 5,090 Issuance of Common Stock................................................. 51 48 Net decrease in book overdraft........................................... (1,213) 0 Principal payments on capital leases..................................... (488) 0 ---------- -------- Net cash provided by (used in) financing activities............. (3,835) 5,138 ---------- --------- EFFECT ON CASH FLOWS OF CHANGES IN EXCHANGE RATES............................................... 12 (6) --------- ---------- Net increase (decrease) in cash and cash equivalents..................... 688 (720) CASH AND CASH EQUIVALENTS: Beginning of period...................................................... 528 1,490 --------- --------- End of period............................................................ $ 1,216 $ 770 ========= =========
(See Notes to Consolidated Financial Statements) 6 UTILX CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. FINANCIAL STATEMENT PRESENTATION In the opinion of management of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position and operating results for the thriee month and six-month period ending September 30, 1998 and 1997. The statements should be read in conjunction with the March 31, 1998 audited consolidated financial statements included in the fiscal 1998 Annual Report on Form 10-K. In June 1997 the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("FAS 131"). FAS 131 establishes standards for disclosures about operating segments in annual financial statements and selected disclosures about operating segments in annual financial statements and selected information in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. FAS 131 supersedes FAS No. 14, "Financial Reporting for Segments of a Business Enterprise." FAS 131 is effective for the year ending March 31, 1999 and requires restatement of earlier periods presented. The impact on disclosures in the Company's financial statements of adopting FAS 131 has not been determined. 2. EARNINGS PER SHARE Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of Common Stock of UTILX Corporation, $0.01 par value per share (the "Common Stock") outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the sum of the weighted average number of shares of Common Stock and, when dilutive, common stock equivalents outstanding during the period. Common stock equivalents include shares issuable upon exercise of the Company's stock options and certain warrants, net of the number of shares repurchasable on the open market with proceeds from the exercise of such options and warrants. Earnings (loss) Per Share is calculated as follows: Basic earnings (loss) per common share
Three Months Ended Six Months Ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- Net income (loss)................................ $ (1,902) $ (320) $ (1,887) $ (588) ========= ========= ========== ========= Divided by weighted average common shares outstanding .............................. 7,422 7,190 7,415 7,187 ========= ========= ========== ========= Basic earnings (loss) per common share........... (.26) $ (.04) $ (.25) (.08) ========= ========= ========== =========
7 Diluted earnings (loss) per common share:
Three Months Ended Six Months Ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- Net income (loss)................................ $ (1,902) $ (320) $ (1,887) $ (588) ========= ========= ========= ========== Weighted average common shares outstanding....... 7,422 7,190 7,415 7,187 Stock options and warrants assumed exercised - net, if dilutive............. 0 0 0 0 ---------- --------- --------- ---------- Total diluted shares outstanding................. 7,422 7,190 7,415 7,187 ========== ========= ========= ========== Diluted earnings (loss) per common share......... $ (.26) $ (.04) $ (.25) $ (.08) ========== ========== ========= =========== 3. ACCOUNTS RECEIVABLE Accounts receivable, trade, net consist of the following: (In thousands) September 30, 1998 March 31, 1998 ------------------- -------------- North American customers: Completed work not yet billed $ 3,914 $ 7,299 Billed but uncollected...................... 9,742 11,527 International customers........................ 1,385 1,349 Less allowance for doubtful accounts........... (470) (455) ---------- ----------- $ 14,571 $ 19,720 ======== ======== 4. MATERIALS, SUPPLIES AND INVENTORIES Materials, supplies and inventories consist of the following: (In thousands) September 30, 1998 March 31, 1998 ------------------ -------------- Raw Materials and Spare Parts.................. $ 8,116 $ 8,810 Work in Process................................ 1,097 684 Finished Goods................................. 34 116 Less allowance for potentially obsolete or overstocked inventory.......................... (697) (771) ------- --------- $ 8,550 $ 8,839 ======= =========
5. NOTE PAYABLE TO BANK The Company has a committed credit facility of $10,000,000 with Seafirst National Bank of Washington ("Seafirst"), scheduled to expire on January 4, 1999. The agreement is collateralized by the Company's inventory and accounts receivable. The credit agreement requires that the Company maintain certain financial covenants, including requirements to maintain certain levels of tangible net worth, working capital and debt ratio. Borrowings bear interest at the Seafirst prime rate, the LIBOR rate plus 2.0%, or other specified rates, at the Company's option. The Company pays a commitment fee of up to 0.25% on the unused portion of the facility. At September 30, 1998 and 8 March 31, 1998, the Company had an outstanding balance of $3,060,000 and $5,245,000, respectively, under this facility at a weighted average borrowing rate of 7.73% and 7.69%, respectively. In addition, at September 30, 1998 the Company had an outstanding $500,000 letter of credit under this facility, expiring April 15, 1999, to secure payments under an insurance policy. No amounts have been drawn on this letter of credit. The Company has been informed by Seafirst that the existing credit facility will not be renewed. The Company has accepted a proposal from Wells Fargo Bank, N.A. for a replacement line of credit for up to $10,000,000. The lender is completing its due diligence and the Company expects to have the replacement credit facility in place prior to January 4, 1999. 6. COMMITMENTS AND CONTINGENCIES FLORIDA SUBCONTRACT NEGOTIATIONS. On October 31, 1997, the Company filed a complaint in Federal District Court in Florida against a contractor in Florida with whom the Company has a contract for certain cable injection services for Florida Power & Light through January 2000, and its principal shareholder. The complaint alleges certain failures and breaches of contractual obligations and requests declaratory relief and determination that the Company has sufficient grounds to terminate its contracts with the contractor. The Company and contractor have an ongoing dispute over the amount to be paid to the contractor under its subcontract for certain cable injection services performed subsequent to April 1, 1997. The complaint also requests, among other matters, that the court determines that the price being paid currently by the Company to the contractor is in accordance with the contract between the parties. This case is in its early stages and at this time it is not possible to predict with certainty the outcome of this matter. INTERNAL REVENUE SERVICE EXAMINATION. Pursuant to the completion of an Internal Revenue Service examination of the Company's Federal Income Tax return for fiscal 1994, the Company filed amended income tax returns for fiscal years 1991 through 1995 in December 1996, claiming additional income tax refunds. The Internal Revenue Service has commenced a new examination of these amended returns. As a result, income tax refunds of $518,000, including a refund related to loss carry-backs from fiscal 1996, are being examined and the Company cannot be assured of receiving such refunds. The Company has agreed to certain adjustments which will not result in a material adverse adjustment to the Company's income tax calculations, and has been informed that no further adjustments will be proposed. However, the Company has not yet agreed to a final examiner's report. CONTRACTUAL COMMITMENTS. Certain contracts were signed in December 1997 for consulting service related to the installation of new computer software in 1998. As of September 30, 1998, total remaining expenditures required in fiscal 1999 to implement the new computer system, including these contracts as well as internal labor, travel, and training costs, are expected to aggregate approximately $800,000. OTHER. The Company is involved in other litigation matters, both as a plaintiff and as a defendant, arising in the ordinary course of its business. Management expects that these matters will not have a materially adverse effect on the consolidated financial position, results of operations or liquidity of the Company. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS REVENUES Consolidated revenues decreased 9% in the second quarter of fiscal 1999, compared to the same period in fiscal 1998. Consolidated revenues increased 4% in the first six months of fiscal 1999, compared to the same period in fiscal 1998. NORTH AMERICAN OPERATIONS. Revenue from North American operations decreased to $17.1 million in the second quarter of fiscal 1999, compared to $19.3 million in the same period of the prior year. Revenues from installation and replacement services in North America, primarily from FlowMole(R) guided boring services, decreased to $12.0 million in the second quarter of fiscal 1999, compared to $14.0 million in the same period of fiscal 1998. Revenues from repair and restoration services in North America, primarily from CableCure(R) injection services, decreased to $5.0 million in the second quarter of fiscal 1999, compared to $5.3 million in the same period of fiscal 1998. Revenues from installation and replacement services in North America increased to $28.0 million in the first six months of fiscal 1999 compared to $26.2 million in the same period of fiscal 1998. Revenues from repair and restoration services in North America decreased to $9.6 million in the first six months of fiscal 1999 compared to $9.7 million in the same period of fiscal 1998. During the second quarter of fiscal 1999, the Company completed the work allocated for the calendar year by its largest customer, Florida Power & Light ("FPL"). The Company maintained certain levels of overhead in anticipation of additional work from FPL in 1998. The work was not forthcoming and the Company incurred losses as a result. The Company will continue to maintain overhead at current levels to support expected future work levels. Unless work levels are increased or overhead expenses are decreased, the Company will continue to incur losses with respect to its Florida operations. Revenue from Florida operations was $4.8 million in the second quarter of fiscal 1999, compared to $6.3 million in the same period of the prior year. Revenue from Florida operations was $14.2 million in the first six months of fiscal 1999 compared to $10.2 million in the same period of the prior year. The March 1998 cancellation of contracts with Washington Gas Company also adversely affected revenues contributing to a decrease in installation and replacement revenues in the second quarter and first six months of fiscal 1999 of $2.4 million and $4.5 million, respectively, compared to the same periods of the prior year. The Company expects to be assigned work by FPL in calendar 1999 at levels similar to calendar 1998. Revenues from FPL were $22.8 million in the first nine months of calendar 1998. FPL's budget for calendar 1999 is expected to be approved in November 1998. Accordingly, the amount of work that FPL will assign to the Company cannot currently be guaranteed at any level. FPL has indicated that it will seek competitive bids for substantial portions of the work, and the Company therefore cannot be assured that it will retain its existing share of FPL's work. INTERNATIONAL OPERATIONS. Revenues from international operations increased to $1.8 million in the second quarter of fiscal 1999, compared to $1.4 million in the same period of fiscal 1998, due primarily to increased revenues from sales of FlowMole equipment to customers in Asia and Europe. During fiscal 1998, the Company was transitioning its equipment manufacturing to outside vendors and after completing sales in the first quarter of fiscal 1998, had no available new equipment to sell before September 1997. Revenues from international operations decreased to $3.3 million in the first six months of fiscal 1998 compared to $3.6 million in the same period of the prior year, due primarily to decreased revenue from international sales of equipment. 10 GROSS PROFIT Gross profit decreased 76% in the second quarter of fiscal 1999, compared to the same period in fiscal 1998. Gross profit decreased 19% in the first six months of fiscal 1999, compared to the same period in fiscal 1998. NORTH AMERICAN OPERATIONS. Gross profit from installation and replacement services decreased in the second quarter of fiscal 1999 compared to the same period of fiscal 1998. The Company was not able to reduce the costs of Florida operations in line with the reduction in revenues, in part due to focusing crews and administrative staff in Florida on job completion, invoicing and collections. In addition, the Company incurred extra costs to temporarily relocate several Florida crews to other regions. Furthermore, the Company chose to maintain a level of overhead costs in Florida consistent with the expectation of increased levels of business in the future. This produced a severe adverse effect on gross profit from North American operations. The results for the third quarter of fiscal 1999 are expected to be severely affected as well, as the Company cannot anticipate any measurable increase in revenues from Florida operations before January 1999, and continues to maintain a sufficient infrastructure in Florida to be able to respond in the event an increase of business is experienced at that time. INTERNATIONAL OPERATIONS. Gross profit from international operations in the second quarter of fiscal 1999 increased compared to the same period of the prior year due to higher revenue levels, but decreased slightly as a percentage of revenues due to the mix of revenues. Gross Profit from European service operations are typically higher than from international sales of FlowMole equipment and spare parts. Gross profit from international operations increased for first six months of fiscal 1999 due to the increased revenues from European service operations, which more than offset the impact of having less revenue from equipment sales. OPERATING EXPENSES AND OTHER INCOME (EXPENSES) Total operating expenses increased 8% in the second quarter of fiscal 1999, compared to the same period of fiscal 1998. Total operating expenses increased 12% in the first six months of fiscal 1999 compared to the same period of fiscal 1998. The increase in selling, general and administrative expenses in fiscal 1999 was primarily generated by increased spending on corporate projects designed to support the Company's planned growth, including costs associated with the selection of a new management information system. The higher level of research and engineering expense in fiscal 1999, while not a significant increase in total dollars spent, reflected increased spending on new electronic guidance devices for the Company's FlowMole equipment. Other income (expense), net, was a net expense of $128,000 and $262,000 in the second quarter and the first six months of fiscal 1999, respectively, compared to expense of $110,000 and $181,000 in the same periods of the prior year. This change was a result of increased interest expense due primarily to new capital leases related to the financing of a portion of the Company's new drilling systems. INCOME (LOSS) BEFORE INCOME TAXES As a result of the foregoing, the Company recorded a pretax loss of $1,911,000 in the second quarter of fiscal 1999, compared to a pretax loss of $320,000 in the same period of fiscal 1998. The Company recorded pretax loss of $1,887,000 in the first six months of fiscal 1999 compared to a pretax loss of $587,000 in the same period of fiscal 1998. INCOME TAX EXPENSE (BENEFIT) The Company would normally expect an effective income tax rate of approximately 40% on positive pretax income. This exceeds the federal statutory rate due to the impact of state income taxes and nondeductible expenses. The Company has provided a valuation allowance against the full amount of the Company's net deferred tax assets. 11 Accordingly, no tax benefits were recorded against operating losses generated in fiscal 1998 and in the first six months of fiscal 1999. NET INCOME (LOSS) As a result of the foregoing, the Company recorded a net loss of $1,902,000 in the second quarter of fiscal 1999, compared to a net loss of $320,000 in the same period of fiscal 1998. The Company recorded a net loss of $1,887,000 in the first six months of fiscal 1999 compared to net loss of $588,000 in the same period of fiscal 1998. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("FAS 131"). FAS 131 establishes standards for disclosures about operating segments in annual financial statements and selected disclosures about operating segments in annual financial statements and selected information in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. FAS 131 supersedes FAS No. 14, "Financial Reporting for Segments of a Business Enterprise." FAS 131 is effective for the year ending March 31, 1999 and requires restatement of earlier periods presented. The impact of adopting FAS 131 has not been determined. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1998, the Company had unused sources of liquidity consisting of $1,216,000 in cash and cash equivalents and an available balance on its committed line of credit of $6,440,000. This compares to $528,000 in cash and cash equivalents and an available balance on its committed line of credit of $4,755,000 at March 31, 1998. Uses of cash during the second quarter of fiscal 1999 primarily related to capital expenditures of $800,000. During the three and six months ended September 30, 1998, the Company substantially reduced its level of outstanding receivables to generate cash from operations. However, further reductions of that magnitude are not expected. Capital expenditures in the six months ended September 30, 1998 primarily included costs associated with the Company's plan to replace virtually all of its management information systems with new enterprise-wide software. The Company has determined that some of its management information systems do not accurately adjust for the Year 2000, and has commenced a project to replace its management information systems in its entirety. The software selected is certified by the vendor to be Year 2000 compliant. The implementation of the new system is scheduled for November 1998. The Company does not anticipate any material charge to earnings associated with writing off the net book value of capitalized hardware and software costs. The Company relies on cash flow from operations and lease financing, in addition to its line of credit, to fund operations. The Company believes that its lease facility and line of credit, together with cash flow from operations, will be adequate to meet its financing needs for the foreseeable future. There can be no assurance that these facilities or similar replacement facilities will continue to be available on terms acceptable to the Company or at all. The Company's financial performance will be a key factor in determining the availability of such facilities. If either facility became unavailable to the Company, or if the Company is required to seek additional capital to fund anticipated growth, the Company would be required to seek other sources of public or private capital. There can be no assurance that adequate funds will be available to the Company through such sources when needed or will be available on terms favorable to the Company. If at any time the Company is unable to obtain sufficient funds, the Company will be required to restrict or eliminate plans for expansion and other aspects of its operations or may be unable to meet its financial obligations on a timely basis. The Company's bank credit facility expires on January 4, 1999 and will not be renewed. The Company has accepted a proposal for a replacement credit facility and expects the lender to complete its due diligence and approve the new credit facility in December 1998. There can be no assurance that the lender will not cancel its offer of credit. Also, although three other potential lenders submitted similar proposals to the Company, there can be no assurance that those offers will continue to be available. 12 REVIEW AND OUTLOOK INSTALLATION AND REPLACEMENT SERVICES. The Company anticipates that opportunities to add installation and replacement services for existing customers will be the primary source of growth in the near future, especially from existing customers who utilize CableCure services. The Company expects FPL to continue to be a significant customer in calendar 1999 and future years. Also, there can be no assurances that competition, budgetary factors or other matters will not reduce the level of work performed for FPL. Also, the Company's revenue levels and the weighted average number of crews in operation on any given day, will be affected by a number of factors, including weather, pricing, competition, customer work release practices, soil and other work difficulty determinants, and permitting. See also the discussion under COMPETITION, SEASONAL FACTORS AND UTILITIES' BUDGETARY CONSIDERATIONS included under "Important Risk Factors Regarding Forward-Looking Statements," below. REPAIR AND RESTORATION SERVICES. The Company expects a continuation of the trend towards increased customer acceptance of the CableCure process, including an increased level of work under "Test, Treat or Replace" contracts. The Company anticipates that the trend towards lower pricing for cable replacement will continue to place downward pressure on the price for CableCure services. The Company's ten largest CableCure customers account for the majority of the Company's CableCure revenues. CableCure revenues in Florida will be a key factor in determining growth in consolidated CableCure revenues in calendar 1999. The Company expects to see increased volumes from new customers in calendar 1999, and some increased volumes from existing customers, but expects to continue to be dependent upon a small number of customers. The Company's goal is to reduce this dependency through growth. Because the Company's customers can typically cancel their work on short notice, a certain degree of uncertainty always exists in the Company's future revenue levels. See also the discussion under COMPETITION, SEASONAL FACTORS, UTILITIES' BUDGETARY CONSIDERATIONS and DOW CORNING CORPORATION included under "Important Risk Factors Regarding Forward-Looking Statements", below. INTERNATIONAL OPERATIONS. Due to adverse developments affecting the general economy in many Asian countries, the Company cannot predict the level of equipment sales in the foreseeable future. However, the Company does expect equipment sales to continue at some modest level. Company management expects most of its international growth to come from CableCure services in Europe. IMPORTANT RISK FACTORS REGARDING FORWARD-LOOKING STATEMENTS The Company may from time to time make written or oral forward-looking statements. Written forward-looking statements may appear in documents filed with the Securities and Exchange Commission, in press releases, and in reports to stockholders. The Private Securities Litigation Reform Act of 1995 contains a safe harbor for forward-looking statements on which the Company relies in making such disclosures. In connection with this safe harbor provision, the Company is hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statement made by or on behalf of the Company. Any such statement is qualified by reference to the following cautionary statements: UTILITIES' BUDGETARY CONSIDERATIONS. Budgetary considerations, arising from unfavorable regulatory determinations on matters such as rate-setting, capitalization of services performed by the Company, approval of mergers and acquisitions or siting of power production facilities, or from reductions in new housing starts, reductions in electric utility revenues due to mild weather, and general economic downturns, or overall utility profitability relative to its objectives have affected the ability of some of the Company's utility customers to sustain their cable replacement or other maintenance programs and accordingly adversely impact the Company's revenues and profits. Although the Company has broadened its customer base, one customer generates over 30% of the Company's consolidated revenues, and a small number of customers generate over 50% of its CableCure revenues. Because cable replacement, restoration and other maintenance programs are, to a substantial extent, deferrable and the Company's contracts with its utility customers permit termination of orders on relatively short notice, postponement or cancellation of such programs by customers can interject substantial volatility into the Company's revenues and profits. COMPETITION. The Company has experienced a long-term trend of declining prices for guided boring services, particularly for smaller diameter utility installations, due to competitive pressures and changes in utility bidding 13 practices. This trend has also caused the Company to lower its prices for CableCure injection services, which are priced at a discount to replacement costs, including replacement via guided boring. In addition, the Company's utility customers are increasing their requests for "turnkey" installation, replacement and restoration services, requiring their drilling contractors to take responsibility for switching circuits, terminating circuits, and other non-incidental tasks. These tasks require additional equipment and labor, and the cost increases can offset any price increase the Company is able to negotiate for the expansion of its services. The overall trend of falling prices for guided boring services is expected to continue into the future, as more customers award work based on competitive bidding, more customers require their drilling contractors to perform additional tasks as part of the drilling contract, and more conventional contractors acquire drilling capabilities in order to enter into this segment of the construction industry. This trend will continue to put downward pressure on the market price for CableCure Services. The Company cannot predict the ultimate duration or the magnitude of such decreases, which could result in a material adverse effect on the Company's financial condition, results of operations and cash flows. SEASONAL FACTORS. Weather and other seasonal factors may decrease the Company's revenues and profits in any given period. Adverse weather may preclude the Company from operating its FlowMole drilling systems or providing its CableCure services at certain times of the year. Such factors severely impacted the Company's operations in the fourth quarter of fiscal 1998. In addition, the Company believes that the regular budgetary cycles of certain of its North American utility customers tend to concentrate demand for the Company's services during the third quarter of its fiscal year (the fourth quarter of the calendar year), although other budgetary factors described below may override this trend in any given quarter and have overridden these factors in calendar 1998. As a result of these factors, results of operations in any given fiscal quarter are not necessarily indicative of results in any other fiscal quarter. MANAGEMENT OF GROWTH. The Company expects significant internal growth. There can be no assurance that the Company's systems, procedures and controls will be adequate to support the Company's operations as they expand. Any future growth will impose significant additional responsibilities on members of senior management, including the need to identify, recruit and integrate new senior level managers and executives. To the extent that the Company is unable to manage its growth efficiently and effectively, or is unable to attract and retain additional qualified management, there could be a material adverse effect on the Company's financial condition, results of operations and cash flows. AVAILABILITY OF QUALIFIED EMPLOYEES. The Company's President and Chief Executive Officer resigned October 30, 1998 and the Company's Senior Vice President and Secretary resigned effective November 13, 1998 and both positions must be filled with permanent replacements. There can be no assurance that such additional management will be identified and retained by the Company. In addition, the Company's ability to provide high-quality services on a timely basis requires an adequate supply of skilled laborers, equipment operators, journeymen linemen and project managers. Accordingly, the Company's ability to increase its productivity and profitability will be limited by its ability to employ, train and retain skilled personnel necessary to meet the Company's requirements. Many companies in the Company's industry are currently experiencing shortages of qualified personnel, and there can be no assurance that the Company will be able to maintain an adequate skilled labor force necessary to operate efficiently, that the Company's labor expenses will not increase as a result of a shortage in the supply of skilled personnel or that the Company will not have to curtail its planned internal growth as a result of labor shortages. DOW CORNING CORPORATION. The Company purchases its CableCure fluid exclusively from Dow Corning. In May 1995, Dow Corning filed for protection under Chapter 11. While the Company has been informed by Dow Corning that it intends to continue the CableCure business, there can be no assurance that Dow Corning or the bankruptcy court will not take action to amend or terminate the CableCure license agreement. FLORIDA SUBCONTRACT NEGOTIATIONS. The Company is party to an agreement (the "underlying agreement") under which it utilizes a single Florida-based subcontractor for performance of certain CableCure injection tasks for FPL through January 2000. The underlying agreement calls for the Company to pay the subcontractor a percentage of the amount charged to FPL for certain services defined in the underlying agreement. The Company agreed to new pricing in its contract with FPL in the first quarter of fiscal 1998. The Company is in a dispute with this subcontractor over amounts to be paid to the subcontractor effective April 1, 1997. An interim agreement, subject to retroactive 14 adjustments, was agreed to by the Company and the subcontractor for the period April 1, 1997 to May 31, 1997. The subcontractor is continuing to perform the injection services required by the Company under the underlying agreement. The Company believes that payments made to the subcontractor subsequent to April 1, 1997 are in conformity with the underlying agreement. The subcontractor claims to be entitled to a percentage of additional amounts. On October 31, 1997, the Company filed suit against the subcontractor in Florida, seeking resolution of the price dispute, among other matters. There can be no assurance that the final price settled upon for payments to the subcontractor will not have a material adverse effect on the gross profit realized by the Company under its contract with FPL. Based on the footage injected by the subcontractor since April 1, 1997, management of the Company does not anticipate that the final resolution of this matter will result in any material adverse impact on its results of operations, or on the Company's consolidated financial position or liquidity. FOREIGN CURRENCY FLUCTUATIONS. The Company's financial results are affected by fluctuations in certain foreign currencies, particularly the exchange rate between the British Pound Sterling and the German Deutschmark. Such fluctuations could result in material adverse adjustments to the carrying values of accounts receivable or other assets measured in foreign currencies, or on the reported results of operations of the Company's European operations. YEAR 2000 RISK FACTORS. Significant uncertainty exists concerning the potential costs and effects associated with Year 2000 compliance. Any Year 2000 compliance problem of either the Company or its major vendors and customers could have a material adverse effect on the Company's financial condition, results of operations and cash flows. YEAR 2000 DATA CONVERSION. The year 2000 issue is the result of computer programs having been written using two digits, rather than four, to define the applicable year. Any of the Company's computers, computer programs, manufacturing and administration equipment or construction equipment used by its crews that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. If any of the Company's systems or equipment that have date-sensitive software use only two digits, system failures or miscalculations may result causing disruptions of operations, including, among other things, a temporary inability to process transactions with third parties or engage in similar normal business activities. During 1997, the Company initiated a project to address the Year 2000 issue that encompasses operating and administrative areas of the Company. In addition, executive management regularly monitors the status of the Company's Year 2000 remediation plans. The process includes an assessment of issues and development of remediation plans, where necessary, as they relate to internally used software, computer hardware and use of computer applications in the Company's processes and products. In addition, the Company is engaged in assessing the Year 2000 issue with significant customers and suppliers. INTERNAL INFRASTRUCTURE. The Company has determined that its propriety equipment used by FlowMole and CableCure crew does not rely on date sensitive software. The Company believes that it has identified substantially all of the major computers, software applications, and related equipment used in connection with is internal operations that must be modified, upgraded, or replaced to minimize the possibility of a material disruption to its business. The Company has commenced the process of replacing systems that have been identified as adversely affected. On November 2, 1998, the Company converted its enterprise wide information systems to newly installed software certified by the vendor to be Year 2000 compliant. Out of an estimated total project cost of $2.5 to $3 million including internal labor, travel and training costs, about $800,000 remained to be spent as of September 30, 1998. SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS. In addition to computers and related systems, the operation of office and facilities equipment, such as fax machines, photocopiers, telephone switches, security systems, elevators, and other common devices may be affected by the Year 2000 problem. The Company is currently assessing the potential effect of, and costs of remediating, the Year 2000 problem on its office and facilities equipment. The Company estimates the total cost to the Company of completing any required modifications, upgrades, or replacements of these other internal systems will not have a material adverse effect on the Company's business or results of operations. This estimate is being monitored and will be revised as additional information becomes available. 15 CUSTOMERS. The Company is preparing to implement a communications plan with its customers to attempt to identify and resolve, if possible, issues associated with the Year 2000. If the Company's customers are unable to resolve Year 2000 issues, those customers could have difficulty preparing new work packages for issuance to the Company or approving and paying invoices for the Company's services. The Company's revenues and cash flows from operations could be severely affected as a result. The Company's customers primarily consist of large utility companies who are expending substantial resources to solve Year 2000 problems. However, there can be no assurance that the Company will be able to identify if its customers have Year 2000 problems that will affect the Company. Also, even if such problems are identified, the Company may not be able to influence its customers to prioritize a timely solution to Year 2000 problems that are identified. Any failure of customers to resolve Year 2000 issues in a timely matter could have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. SUPPLIERS. The Company has initiated communications with third party suppliers of the products and financial services used, operated, or maintained by the Company to identify and, to the extent possible, to resolve issues involving the Year 2000 problem. The Company believes that its major suppliers are adequately addressing their Year 2000 exposure. However, the Company has limited or no control over the actions of these third party suppliers. Thus, while the Company expects that it will be able to resolve any significant Year 2000 problems with these systems before the occurrence of a material disruption to the business of the Company or any of its customers, any failure of these third parties to resolve Year 2000 problems with their systems in a timely manner could have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS. The Company expects to identify and resolve all Year 2000 problems that could materially adversely affect its business operations. However, management believes that it is not possible to determine with complete certainty that all Year 2000 problems affecting the Company have been identified or corrected. The number of devices that could be affected and the interactions among theses devices are simply too numerous. In addition, one cannot accurately predict how many Year 2000 problem related failures will occur or the severity, duration, or financial consequences of these perhaps inevitable failures. As a result, management expects that the Company could likely suffer the following consequences: 1. a significant number of operational inconveniences and inefficiencies for the Company and its clients that may divert management's time and attention and financial and human resources from its ordinary business activities; and 2. a lesser number of serious system failures that may require significant efforts by the Company's customers to prevent or alleviate material business disruptions. CONTINGENCY PLANS. The Company is currently developing contingency plans to be implemented as part of its efforts to identify and correct Year 2000 problems affecting its customers or major vendors. The Company expects to complete its contingency plans by June 30, 1999. These plans could include increased work hours for Company personnel or use of contract personnel to provide manual workaround for customer work release systems or invoice approval processes, and similar approaches. If the Company is required to implement any of these contingency plans, it could have a material adverse effect on the Company's financial condition and results of operations. 16 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS UTILX CORPORATION VS. POWER CABLE RESTORATION, INC. AND RONALD E. ALESHIRE - On October 31, 1997, the Company filed a complaint in Federal District Court in Florida against Power Cable Restoration, Inc. ("PCR"), a contractor in Florida with whom the Company has a contract for certain cable injection services for Florida Power & Light through January 2000, and Ronald E. Aleshire, a principal shareholder in PCR. The complaint alleges certain failures and breaches of contractual obligations and requests declaratory relief and determination that UTILX has sufficient grounds to terminate its contracts with PCR. The Company and PCR have an ongoing dispute over the amount to be paid to PCR under its subcontract for certain cable injection services performed subsequent to April 1, 1997. The complaint also requests, among other matters, that the court determines that the price being paid currently by UTILX to PCR is in accordance with the contract between the parties. In December 1997, the defendants filed a Motion for Dismissal and a Motion to Transfer Action. In January 1998, defendants' Motion to Transfer Action to the Southern District of Florida was granted. In April 1998 the Court denied defendants' Motion to Dismiss (with the limited exception of UTILX's prayer for attorneys fees which was dismissed without prejudice). Discovery has progressed with UTILX obtaining production of certain documents of PCR. UTILX was required to file a Motion to Compel Discovery to obtain access to additional records PCR had objected to producing. The Motion to Compel was granted in April 1998 and PCR's Motion for Reconsideration of the Order Compelling Discovery was denied in May 1998. The review of additional records commenced in June 1998. PCR has requested and received documents from UTILX. Additionally, UTILX conducted depositions of PCR employees in April 1998 and July 1998 and additional depositions are scheduled. PCR has deposed one UTILX representative and one FPL representative has also been deposed. The case has been placed on the two week trial calendar for January 18, 1999. Discovery and other pretrial activities must be completed before then. PCR filed a Motion to Compel Arbitration of a portion of the case (i.e., issues relating to a subcontract for the period from March 1996 to March 1997). The motion was originally denied, but then granted when reviewed in October 1998. A portion of the case dealing with work under a subcontract between PCR and UTILX from March 1996 to March 1997 will be arbitrated. UTILX will proceed rapidly with the AAA to process arbitration. The District Court case will be temporarily stayed pending the arbitration.. PCR has filed its answer and counterclaims to UTILX's complaint. PCR formally denied any liability to UTILX and has asserted a counterclaim alleging breach of contract by UTILX. In addition, PCR has requested declaratory relief with respect to the establishment of appropriate compensation to PCR for cable injection services. UTILX filed its answer to the counterclaim and has unequivocally denied all counterclaims asserted by PCR. The parties are obligated by court order to engage in a formal mediation and discussions have taken place with respect to the selection of a mediator and potential scheduling of the mediation. There is still substantial discovery and trial preparation work to be accomplished and at this time it is not possible to predict with certainty the outcome of the matter. The Company is involved in other litigation matters, both as a plaintiff and as a defendant, arising in the ordinary course of its business. Management expects that these other matters will not have a materially adverse effect on the consolidated financial position, results of operations or liquidity of the Company. 17 ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER In accordance with the Company's Bylaws, a shareholder proposing to transact business at the Company's annual meeting must provide written notice of such proposal, in the manner provided by the Company's Bylaws, not fewer than 60 nor more than 90 days prior to the date of such annual meeting (or, if the Company provides less than 60 days notice of such meeting, no later than 10 days after the date of the Company's notice). In addition, if the Company receives notice of a shareholder proposal less than 45 days prior to the date of mailing the notice of such annual meeting, the persons named as proxies in such proxy statement and proxy will have discretionary authority to vote on such shareholder proposal. The expected mailing date of the notice of the Company's 1999 annual meeting is June 30, 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27.1 Financial Data Schedule. Filed herewith. (b) Reports on Form 8-K: None 18 UTILX CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UTILX CORPORATION -------------------------------- (Registrant) Date: November 9, 1998 By:/s/ William M. Weisfield ------------------------------------- William M. Weisfield, President and Chief Executive Officer Date: November 9, 1998 By:/s/ Larry D. Pihl ------------------------------------- Larry D. Pihl, Vice President and Chief Financial Officer 19 UTILX CORPORATION As Filed with the Securities and Exchange Commission on November 13, 1998 File No. 0-16821 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- EXHIBITS TO QUARTERLY REPORT FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 UNDER THE SECURITIES EXCHANGE ACT OF 1934 --------------------- UTILX CORPORATION INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION --------- ------------- 27.1 Financial Data Schedule. Filed herewith. EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF UTILX CORPORATION FOR THE THREE MONTHS ENDED IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 6-MOS MAR-31-1999 MAR-31-1999 JUL-01-1998 APR-01-1998 SEP-30-1998 SEP-30-1998 1,216 1,216 0 0 15,042 15,042 471 471 8,550 8,550 24,948 24,948 38,709 38,709 25,252 25,252 38,819 38,819 12,642 12,642 3,126 3,126 0 0 0 0 74 74 22,977 22,977 38,819 38,819 18,885 40,908 18,885 40,908 18,453 37,899 20,668 42,533 (36) (80) 0 0 164 342 (1,911) (1,887) (9) 0 (1,902) (1,887) 0 0 0 0 0 0 (1,902) (1,887) (0.26) (0.25) (0.26) (0.25)
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